When President Trump won the election, James Hagedorn was ready to take it to the bank. The chief executive of Scotts Miracle-Gro expected that Republicans would reduce his firm’s tax rate from about 36 percent to 20 percent or less.
He did not expect that Republicans would take such a broad approach to fulfilling Trump’s promises on trade, with stiff new taxes on imports. The dirt sold by Scotts is largely raw materials imported from abroad, such as Canadian peat and processed coconut shells from Sri Lanka.
Under a corporate tax plan that Republicans in the House are pushing, Scotts does not expect any tax relief. In fact, the company projects that its rate could tick up to about 37 percent.
"My wife, who’s a radical Democrat, is laughing at me on this one," said Hagedorn, who voted for Trump and continues to support the president. "It never occurred to me it would actually get worse for us, not better."
House Republicans would simplify the corporate tax code with a 20 percent flat tax. But the proposal also would add a "border-adjustment tax" that some economists worry would increase costs for companies that rely heavily on imported goods.
The GOP proposal would exempt American firms that export goods and services to customers overseas from paying taxes on those exports. At the same time, the plan would prevent firms from deducting purchases from abroad from their overall income, essentially levying a new tax on imports.
Rep. Kevin Brady, R-Tex., the chairman of the Ways and Means Committee in the House, has argued that currently, U.S. products are at a disadvantage in the international system. "This means today Chinese steel is cheaper here in the U.S. than American steel. Mexican beef and autos are cheaper than American beef and autos. Foreign oil is cheaper than American oil," Brady said last week.
If that new tax increases the prices of foreign imports as Brady promised, that would be bad news for firms that rely on raw materials from overseas — whether steel, oil or coconuts.
Overall, Miracle-Gro spends about $240 million annually on foreign raw materials, mostly for peat. That is about 8.5 percent of the company’s $2.8 billion in sales.
Hagedorn, a veteran of the Air Force who was formally reprimanded by the board of Scotts in 2013 for using colorful language, said that his company would not be able to buy what the company needs domestically. "Effectively, at that quality level, it’s not available in the United States," he said.
For instance, a bag of Miracle-Gro Moisture Control Potting Mix is about 60 percent Canadian peat by volume, according to the company. The firm also relies heavily on imported urea, an ingredient in fertilizer derived from natural gas.
The processed coconut shells are known as coir, a fibrous, spongy material that is ideal for planting lawns. Not just any coconuts will do, though. The husks of those that grow in the Americas are too salty for horticulture.
The U.S. market relies instead on Sri Lankan coir. Imported coir makes up about 80 percent of the volume in the grass seed the company packages as Scotts EZ Seed.
Sri Lankan coconut growers get paid for husks that might otherwise go to waste. Half a world away, homeowners in the United States enjoy more attractive lawns.
It is exactly the kind of global economic interdependence that President Trump has pledged to disrupt, and Scotts, based in Marysville, Ohio, is one of many American firms that could be forced to pay new taxes on imports.
The plan from Republican lawmakers has received some favorable comments from White House staff, including press secretary Sean Spicer, but it remains to be seen whether Trump will endorse it. Broadly speaking, the president has said that he would like to tax imports.
If he does endorse the Republican plan, there is disagreement about how the plan would affect importers such as Scotts. Even the plan’s proponents have sometimes put forward apparently conflicting predictions about the consequences.
Some economists say that the Republican plan will not ultimately affect importers’ bottom lines, because of how the new system would affect exchange rates.
Based on this reasoning, the dollar would become more valuable in real terms, because any foreigner hoping to buy U.S. goods and services in dollars would be able to avoid U.S. taxes. Likewise, since Americans hoping to use foreign currency to buy products from overseas would have to pay taxes, that foreign currency would really be less valuable.
In combination, economists say these shifts should result in a stronger dollar on global currency markets, exactly canceling out any effects of the new system on American companies such as Scotts Miracle-Gro.
When other countries have implemented similar policies, exchange rates typically have adjusted in response, according to forthcoming research by economists Caroline Freund and Joseph Gagnon of the Peterson Institute for International Economics in Washington. The currency markets have absorbed any real effect on companies.
A corporate rate of 20 percent under the House Republicans’ plan implies that the dollar should increase in price by exactly 20 percent in response. Given that Scotts today spends $240 million on foreign materials, the company would be able to get the same products for just $200 million if the dollar appreciated by 20 percent.
Under the Republican plan, Scotts would then pay 20 percent in taxes on those imports, bringing the total cost to the company back up to $240 million. Freund and Gagnon’s study offers only small comfort for U.S. importers, though. Freund noted that historical examples from abroad might not be comparable to the U.S. case, because of subtle differences in exactly what would be taxed under the GOP plan.
Also, similar policies in other countries have often brought rapid inflation, the study shows. The Federal Reserve might try to slow the process down, in which case importers would be left holding the bag in the meantime.
"I’m reasonably confident that real exchange rates will eventually adjust," Freund said. "’Eventually’ is the key word here, because we don’t know when."
Republicans are planning on cutting taxes overall, so if exchange rates adjusted to relieve the burden on imports, Scotts Miracle-Gro would someday enjoy substantially reduced costs under the GOP plan. On the other hand, that same math implies the tax would not achieve Brady’s goal of helping U.S. suppliers compete by making imports more expensive.
Hagedorn said he had a "great" meeting with Brady last year, but the businessman is not reassured by economists’ predictions about the dollar. Currency markets are notoriously volatile, and he is not comfortable planning the company’s operations around possible fluctuations in the exchange rate.
Trump has said repeatedly he wants to punish companies that shift manufacturing abroad, but even U.S. manufacturers that simply rely on components and raw materials from overseas could be pay more under the GOP plan. Hagedorn notes that his company employs only a handful of people outside the United States and has been headquartered in Marysville for 149 years.
"I would think Trump would look at us and say, ‘That’s exactly what I’m talking about,’ " Hagedorn said, describing Scotts as a "true-blue American" company.
Complaints from corporate leaders such as Hagedorn, whose family’s 27 percent stake in Scotts is worth roughly $1.4 billion, are why some on Wall Street doubt that the Republican plan will go forward.
"Trump wants to make business, in theory, easier," said Ivan Feinseth, the director of research at Tigress Financial Partners in New York. "If he runs into a situation that doesn’t meet that, he will be a little bit flexible."
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